According to the Illinois Attorney General, a person who dies with a $5,000,000 estate held entirely in Illinois owes about $285,714 in Illinois estate tax, while owing nothing to the federal government. That gap surprises many families, and it matters on the North Shore, where a home, a retirement account and a life insurance policy can add up quickly. Understanding how life insurance and the Illinois estate tax interact is the first step toward making sure a payout meant for your family is not partly consumed by a tax bill.
This guide explains the Illinois threshold, how a policy’s death benefit can count toward it, and the planning tools Winnetka families commonly discuss with their attorneys.
Illinois taxes estates far below the federal level
Illinois has its own estate tax, and it applies to estates much smaller than the federal one does. The Illinois Attorney General’s estate tax fact sheet states that the Illinois exclusion amount is $4,000,000, and that an Illinois Form 700 must be filed when an estate’s gross value exceeds that figure after adjusted taxable gifts are added in, whether or not a federal return is required.
The federal picture is very different. The IRS lists a 2026 federal estate tax filing threshold of $15,000,000. An Illinois family can therefore be well clear of federal estate tax and still face a significant state bill.
The Attorney General also notes that the Illinois exclusion is a taxable threshold, not a credit, and that the tax is calculated with an interrelated formula. The return and tax are due nine months after the date of death.
No portability between spouses in Illinois
The federal system, as the IRS explains, lets a surviving spouse use a deceased spouse’s unused exemption, a feature called portability. Illinois does not. The Attorney General’s fact sheet states plainly that portability of the unused federal exemption does not apply to the computation of the Illinois estate tax.
In practice, this means a married couple cannot simply rely on the surviving spouse inheriting everything and then using a combined $8 million exclusion. Property passing to a spouse can qualify for the marital deduction, and Illinois allows its own election for certain marital trusts, but once the second spouse dies, the estate faces the $4 million threshold on its own. Couples near the line often work with an estate attorney on trust planning to use both spouses’ exclusions.
How a life insurance payout can count toward your estate
Life insurance is not automatically outside the estate tax; whether the payout counts toward your estate depends largely on who owns the policy. Under 26 U.S.C. § 2042, the gross estate includes life insurance proceeds payable to the estate, and proceeds payable to any other beneficiary when the person who died held any “incidents of ownership” in the policy.
Incidents of ownership include rights such as changing the beneficiary, borrowing against the policy, surrendering it or assigning it. If you own a policy on your own life, the full death benefit generally belongs in the gross estate, even though it goes straight to your children. Because the Illinois return is prepared from the same schedules as the federal return, that benefit is part of the gross value measured against the $4 million threshold.
Consider how quickly the numbers rise in Winnetka. When the Cook County Assessor released 2025 values for New Trier Township, which includes Winnetka, total assessed value in the township had risen 39 percent, reflecting three years of market changes. Add retirement savings, a brokerage account and a $1.5 million policy, and a household that never thought of itself as wealthy can cross the Illinois line.
Federal and Illinois rules side by side
The table below summarizes the main differences drawn from the Attorney General’s fact sheet and the IRS.
| Feature | Federal estate tax | Illinois estate tax |
|---|---|---|
| Threshold | $15,000,000 filing threshold for 2026 deaths | $4,000,000 exclusion |
| Portability to a surviving spouse | Available | Does not apply |
| Who administers it | Internal Revenue Service | Illinois Attorney General |
| Where the return goes | Filed with the IRS | Filed with the Attorney General; Cook County estates use the Chicago office |
| Life insurance you own | Included in the gross estate | Included through the same gross estate |
Ownership is the main planning lever
Changing who owns a policy is the most common way families keep a death benefit outside the taxable estate. If a policy is owned from the start by an irrevocable life insurance trust, often called an ILIT, or by an adult child, the insured holds no incidents of ownership, and the proceeds are generally not included in the insured’s gross estate.
Timing matters. Under 26 U.S.C. § 2035, if you transfer an existing policy and die within three years of the transfer, the proceeds are pulled back into your gross estate. That is why many attorneys prefer that a trust apply for and own a new policy from day one, rather than receiving one you already have.
An ILIT also brings rules of its own: the trust is generally permanent, the insured generally should not hold control over the policy as trustee, and premiums are usually funded through gifts to the trust. These details belong with an estate attorney, and a good life insurance plan is built to fit whatever structure the attorney recommends.
Using life insurance to pay the tax
Even when the benefit stays inside the estate, life insurance can solve the estate tax problem by providing cash exactly when the bill comes due. Estates are often rich in assets that are slow or costly to sell, such as a family home, a share of a business or a concentrated stock position. With the Illinois tax due nine months after death, heirs without cash may be forced to sell at a bad time.
Permanent coverage, such as whole life insurance, is the usual fit for this job because the need does not expire on a fixed date the way a mortgage does. Some married couples consider a second-to-die policy that pays when the surviving spouse dies, which lines up with the moment the Illinois exclusion is most likely to be exceeded.
The amount is a planning estimate, not a guess. Families typically start with a projected estate value, ask their attorney or accountant to estimate the Illinois tax using the Attorney General’s calculator, and size coverage to that figure plus any other costs heirs would face.
Common mistakes to avoid
A few errors come up repeatedly when life insurance meets the Illinois estate tax:
- Assuming insurance is never taxed. Beneficiaries usually owe no income tax on proceeds, but that is a different rule from estate tax.
- Naming the estate as beneficiary. Proceeds payable to the executor are included in the gross estate under § 2042 regardless of ownership.
- Transferring an old policy late. The three-year rule can undo the transfer entirely.
- Planning only for federal tax. A plan built around the $15 million federal threshold can miss the Illinois bill altogether.
- Forgetting to review. Home values, account balances and coverage change, so a plan that fit five years ago may not fit today.
Where to begin if your estate is near $4 million
Start with an honest estimate of what your estate would be worth today, counting the full death benefit of every policy you own. If that figure is approaching or above $4 million, two questions deserve an answer before anything else: who should own your life insurance, and how will your heirs pay any Illinois tax within nine months? An estate attorney answers the first; the second is where the type and size of coverage come in.
If you would like to see how permanent coverage could fit alongside your attorney’s plan, our page on whole life insurance in Winnetka explains the options, and a policy review can show what your current coverage adds to your estate. Winnetka Life Insurance serves families across the North Shore, and you can learn more on our homepage.
Sources
- Illinois Attorney General — Important Notice Regarding Illinois Estate Tax and Fact Sheet
- Internal Revenue Service — Estate Tax
- Cornell Law School Legal Information Institute — 26 U.S.C. § 2042
- Cornell Law School Legal Information Institute — 26 U.S.C. § 2035
- Cook County Assessor’s Office — Property Values for New Trier Township Released